# Understanding CSA and novation

I had an example at work which I didn't have full intuition of. The example is as follows:

You have novated a forward starting cross-currency basis swap (let's say 10y10y EUR ccbs). The PV is agreed with counter party 'A' stepping in. However, there is a CSA implication... the remaining counter-party 'B' is on USD CSA whereas counter-party 'A' is in GBP CSA. Counter-parties A & B will now face each other on the trade.

Simply put, what are the steps to take in order to calculate the CSA impact, and who should pay/receive the CSA fee? I started to get lost once the third currency was factored in (GBP).

Appreciate any help on this, and thanks in advance!

• I just want to make this clear: your institution used to have a trade with B, and following the novation, A has a trade with B. Correct ? – dm63 May 10 '20 at 11:01
• yes, that's correct – DanielC May 11 '20 at 4:48

This is an unclear question so let me first state my assumption of what you are asking.

• You work for organisation C and are asking from organisation C's persepctive:
• C has, initially, a 10y10y cross-currency EUR/USD basis swap with counterparty B.
• C is coordinating a novation to 'step out' of the trade and counterparty A will replace them.
• B is a remaining party to trade so that they previously faced C and will now face A.
• C has a USD CSA agreement with B and C has a GBP CSA agreement with A.

The information of the CSA agreement between C and A is irrelevant, C is not facing A on the trade.

The information of the CSA agreement between B and A is relevant and is not provided.

Suppose you were able to calculate the following:

• Trade between C and B is valued at \$100 under a USD CSA. (C has asset) • Trade between A and B is valued at \$110 under a XXX CSA. (A has asset)
• Trade between A and C is valued at \$105 under a GBP CSA. (A has asset) What should happen, theoretically is that: • C should receive \$100 to replace its asset, payable by A.
• A should pay \$10 to B: • A now has an asset worth \$110 and it has paid $110 in total for it. • B now has a liability valued at \$110 that was originally only \$100 and has received$10 compensation.

• Yep, your assumption is correct. CTPY C (ME) vs CPTY B (Original) USD CSA. CTPY C (ME) vs CTPY A (Stepping in to face ctpy B) GBP CSA. In short, how would you calculate USD->GBP CSA switch. – DanielC May 11 '20 at 6:18
• I explained that the CSA between C and A is NOT relevant, only CvsB and AvsB is relevant. As counterparty C you should only be concerned with 2 things: 1 recovering fair value of your existing asset (as it faces B), 2 ensuring client B is not disenfranchised when he is novated to A. Calculating the differences requires only discounting the cash flows with the correct discount curve, constructing those curves is a complex process – Attack68 May 11 '20 at 6:48